Re: Secret pricing (RE: Response from Ted Bergstrom to Ann Okerson)

[Phil Davis <pmd8@cornell.edu>]

Joe Esposito concluded with, "Long live confidentiality agreements and
discriminatory pricing.  It sounds horrible, but it makes for a better
world."

Joe, your explanation on price discrimination is fine and sound, but you
conclude by conflating discriminatory pricing with confidentiality
agreements.  A better world -- as an economist would see it -- would allow
perfect information in the market.  That is, pricing remains transparent
and available to all customers.

Yet price discrimination does not necessarily mean confidentiality
agreements, and we should be careful not to confuse the two.  Many society
publishers have tiered pricing models (based on size, Carnegie class,
location, etc.) that charge different prices to different consumers.  
Their prices are publicly available from their website and information
sheets sent to librarians.  These are cases where discriminatory pricing
is completely transparent.  There are lots of examples of tiered pricing
in everyday life, like at the movie theatre which give children and
seniors a break, and these prices are publicly displayed at the ticket
counter.

An excellent description and example of price discrimination can be found
at Wikipedia:

http://en.wikipedia.org/wiki/Price_discrimination

> From Wikipedia:
Price discrimination exists when sales of identical goods or services are
transacted at different prices from the same provider. In a theoretical
perfect free market, that is, one with perfect information and no
transaction costs, price discrimination should be exclusively a feature
only of monopoly markets; in practice, however, it occurs with oligopolies
such as the airlines, and even in fully competitive retail or industrial
markets.

--Phil Davis


At 07:26 PM 11/13/2005, you wrote:
> Discriminatory pricing is a net positive for producers and consumers
> alike, despite the emotionally laden term.  It would be smarter to call it
> progressive pricing, in the political sense of progressive, but that would
> earn catcalls, too.
>
> Here is an example (rendered hypothetical) that came up in a recent
> project I was working on in the area of college textbooks.  A textbook
> publisher spends $1 million to develop a textbook.  The estimated market
> is for 100,000 copies, of which three-fourths are in the U.S.  The
> publisher could amortize all the development costs across all the copies
> (that is, $10/copy), but since the copies sold outside the U.S. are likely
> to go into weaker economies, the decision is made to amortize the
> development costs over domestic sales only. Thus the U.S. copies have a
> plant or development cost of roughly $13/copy, whereas the copies shipped
> outside the U.S. have an imputed plant cost of $0.
>
> The different plant costs are reflected in the prices--discriminatory
> pricing:  more in the U.S., less in China.  The text sells for (say) $100
> in the U.S., $50 in China.  But then, using the Internet and the
> attributes of a global economy, the copies in China are imported back into
> the U.S. and sold for $75.  This is actually going on right now at UCSD
> (among other places).  A friend's kid, who is is an undergraduate there,
> set the whole thing up and is likely to pay for his tuition this way.
> This is arbitrage marketing.
>
> So what will happen?  The U.S. publisher will stop putting lower prices on
> the export edition in order to maintain margins at home.  Who wins?
> Nobody.  The Chinese can't afford the book, and the U.S. publisher
> effectively has lost a market.
>
> Long live confidentiality agreements and discriminatory pricing.  It
> sounds horrible, but it makes for a better world.
>
> Joe Esposito